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The ability to manage supply chains effectively is a key component of corporate success. Adopting a supply chain management strategy (inventory strategy) that works to minimize costs, enhance quality and efficiency of products and services rendered, and maintain sufficient levels of inventory while reducing associated carrying costs is ideal for all businesses. Achieving such a goal, however, is quite challenging and most businesses adopt inventory strategies that best enable them to fulfill their most primary needs (e.g. reducing inventory costs and delivering high-quality products). Supply chain management relates to “the management and coordination of a products supply chain for the purpose of increasing efficiency and profitability” (Investopedia, 2008). In order to deliver quality products to customers in a timely manner while decreasing operating costs, businesses must have a sound understanding of supply chain management (SCM) and all that it entails.
“Supply chain management (SCM) is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and integrating these flows both within and among companies. It is said that the ultimate goal of any effective supply chain management system is to reduce inventory (with the assumption that products are available when needed)” (Search CIO, 2006)
Many businesses have difficulty realizing enough operating capacity to manufacture all their products in-house while attempting to minimize operating costs including inventory, labor, and other fixed costs. To accommodate for their capacity inefficiencies and fulfill costs objectives, businesses often rely on outsourcing production to global (offshore) suppliers.
Kuiper recently entered into another product line, Radio Frequency Identification Devices (RDIF’s). RDIF is technology among retail stores for controlling inventory costs and for reducing the costs of checking out customers. RDIF tags are specially coded cloth or plastic that sends radio signals to receiving antennas that can be far away. Currently, Kuiper is having issues with maintaining inventory with an order larger than the usual order and limited resources. In this analysis, there will be a few options discussed on where Kuiper stands in the organization now and how Kuiper is going to correct issues to get to their end state vision and take care of those large unexpected orders.
The following will provide an all-encompassing solution for Kuiper Leda.
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Issue and Opportunity Identification
Kuiper Leda faces the immediate and pressing issue of developing ways to provide Midland Motors, a potential revenue-boosting client, with the products it demands in an efficient and high-quality manner. In conjunction with this issue, the company faces the challenge of being able to obtain or free up enough operating capacity to carryout the production of its Electronic Control Units (ECUs) and Radio Frequency Identification (RFID) tags which Midland Motors desires. In addition to ECUs and RFID technology, Kuiper Leda produces microchips for electronic components. Inventory management is a costly asset to maintain. Having the right amount of inventory to meet customer requirements at the right time is critical. Too much inventory on hand can affect the cash conversion cycle, leading to a slow return on cost of goods. With Kuiper’s current daily production of 1,250 ECU units and 250 RDIF units, the JIT forecast to meet 250,000 ECU’s and 35,000 RDIF’s on a monthly basis will require seven times the number of ECU’s and five times that of RDIF’s currently produced on a daily basis. However, Kuiper Leda will be unable to manufacture all products in-house. The company must rely on the external production of one or more of these products. Because Midland Motors is concerned primarily with finding a supplier that will produce RFID tags in a timely and qualitative manner, Kuiper Leda must consider strongly producing these products in-house while exporting, either entirely or partially, the production of the other products to third-party manufacturers.
As stated, to comply with Midland Motors’ large annual order, Kuiper Leda must and can outsource the production of one of its core offerings temporarily until Midland’s order has been filled and workflow capacity has been increased. The company has the opportunity to outsource the production of its ECUs (via the E-Portal), which would yield efficient operating capacity and aid Kuiper Leda in realizing a 4-week lead-time, which complies with Midland Motors’ order-specifications. Consequently, the company will then be able to manufacture the RFID tags and microchips in-house, which will add to its core capabilities, minimize expenditures, and comply with product timelines. The contribution margin for the company is $45 dollars if the RFID tags are manufactured in-house, which is significantly higher than the margin would be if Kuiper Leda elected to outsource RFID production.
In order to adhere to Midland Motors’ demands and similar future demands from other clients, Kuiper Leda can adopt an inventory management strategy that encompasses a reliable independent ordering system (orders need to be planned in advance), which works to maintain efficient inventory levels by forecasting demand instead of anticipating demand. The system should incorporate the “Lot for Lot” ordering rules in which supplier order exactly what they need and changes in order quantity result only from changes in necessities. These rules provide suppliers with more flexibility by decreasing or eliminating entirely shortages and surpluses. An order fill rate of approximately 80% would assist the company in fulfilling to the majority of customer orders in the timeframe they request. At 80%, the order fill rate should not yield excesses in safety stock and significant increases in carrying costs. Lastly, the “Lot for Lot” ordering rules would work best with a predetermined ordering frequency. With that said, Kuiper Leda should maintain, at most, a 2-weeks supply to account for scientifically forecasted future demand. Two weeks worth of inventory should not add any significant costs. The fore mentioned order frequency, order fill rate, and ordering system would all work to meet Kuiper Leda immediate needs. With regard to the future, however, the company may decide to alter its ordering system along with is supplementary components to account for fluctuating demand and batch orders.
(also known as lean manufacturing) approach to distribution management will be ideal for Kuiper Leda. JIT is “an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method requires that producers are able to accurately forecast demand” (Investopedia, 2008). JIT, if implemented correctly, can help businesses save money and become more responsive to their customers. The JIT distribution strategy yields lower total systems costs and improved product quality. The completely knocked down (CKD) option would be best suited for this distribution strategy as it relates to Kuiper Leda’s immediate objectives. By choosing this option, the company will export all necessary electrical components to an assembly partner in the U.S. that will assemble the electrical components and deliver a final product to customers. Coupled with the JIT distribution strategy, Kuiper Leda should choose a demand management strategy that provides the company with pinpoint forecast analyses. To successfully implement a JIT distribution that works, companies must be able to forecast demand precisely. If this condition is not met, the implementation of the JIT system may cause inventory shortages.
Stakeholder Perspectives/Ethical Dilemmas
A firm's stakeholders are the individuals, groups, or other organizations that are affected by the firm's decisions and actions. Depending on the specific firm, stakeholders may include governmental agencies such as the Securities and Exchange Commission, social activist groups such as Greenpeace, self-regulatory organizations such as the National Association of Securities Dealers, employees, shareholders, suppliers, distributors, the media and even the community in which the firm is located among many others (Droege, 2006. Par. 1).
In Kuiper Leda, the stakeholders are Customers who take interest in the quality of goods and services. Customers expect on time delivery and customers expect to be treated fairly. Other stakeholders are suppliers; suppliers take interest in making a good return on investments. Suppliers have the right to monitor business affairs and regulation and rules. Stockholders also are employees in Kuiper Leda. Employees have an interest in protecting investments, the right to vote and point the company in the right direction.
Above all, the company values and understands the difficulties surrounding supply chain management and seeks to adopt a strategy that helps it meet the demand of Midland Motors and other prospective customers. Kuiper Leda has the right to accept or deny the business of Midland Motors. Because the company has agreed tentatively to terms with Midland Motors, Kuiper Leda had the responsibility of upholding its end of the bargain. To do so, the company can elect to produce electrical components in-house while exporting the production remaining components to third-party manufacturers/producers. The company also has the right to take every measure (within legal guidelines) to secure the business of a profitable customer like Midland Motors.
Kuiper Leda will outsource the production of ECUs using the E-portal, which will increase its production capacity for RFID tags. Outsourcing the production of ECUs will help Kuiper Leda to fulfill Midland Motor’s order in a timely manner. This gives Kuiper Leda the upper hand to produce a mass amount of RFID tags and still be able to fulfill their regular order status. This solution will solve Kuiper Leda’s problem of filling the large order of Midland Motor for seven times the number of ECU’s and five times that of RDIF’s that already being produced.
Kuiper Leda will adopt a Supply Chain Management strategy, which will assist it in accommodating Midland Motors and maintain low overhead costs simultaneously. This strategy will solve Kuiper Leda’s problem of manufacturing at high levels in keeping inventory overstocking or under stocking in line, maintaining low overhead costs. Kuiper Leda will eventually obtain the production capacity to assemble RFID tags, ECUs, and microchips in-house. This action will solve Kuiper Leda’s problem of outsourcing their orders, saving money and increasing employee morale with promotions due to a growing business.
The problems that Kuiper Leda has can be solved through analytical thinking and teamwork of corporate executives and employees. The Supply Chain Management helps organizations in ways such as product, information, and finances as they move forward in the process (from supplier to manufacturer to wholesaler to retailer to consumer).
In order to address its immediate issues and similar future issues, Kuiper Leda will outsource the production of ECUs using the E-portal which will increase its production capacity for RFID tags. This measure will assist the company in fulfilling current orders (e.g. the Midland Motors’ order) despite its inefficient operating capacity. The company will also adopt a supply chain management strategy that will assist it in accommodating Midland Motors and maintain low overhead costs simultaneously. The implementation of a supply chain management strategy which incorporates the Just-In Time (JIT) approach to inventory management aid Kuiper Leda in assuring that it carries only the required levels of material while maintaining the quality and efficiency of its products. In addition to the aforementioned end-state goals and in direct conjunction with the latter goal, Kuiper Leda will elect to centralize its distribution channel decreasing transportation costs and other overhead costs while maintaining an efficient level of inventory at a primary warehouse in effort to offset fluctuating demand.